Growth Dollars under pressure

Like a phoenix, the CAD has risen from its lowest level in almost two weeks outright on increased demand for this particular higher-yielding growth currency. The Fed acknowledged that US economic growth “strengthened somewhat” in the third-quarter, giving global equities and commodities a boost. This is always favorable for growth sensitive currencies, especially one that have such a strong trade association with the US. Strong private employment numbers down south suggests that the US may skate a recession. Tomorrow, the market gets the privilege to trade last months NFP and Canadian employment reports. What’s good for the US tends to always be good for its largest trading partner.

The Canadian Finance Minister stated earlier this week that the BoC’s mandate will remain unchanged, allowing Governor Carney to rule the roost the same as before. The CAD, when under duress this week, certainly outperformed other risk sensitive currencies. The BoJ’s intervening actions indirectly dragged the dollar higher and at the same time the loonie was reluctant to fall.

Carney’s comments last week were very transparent. He is concerned about sustainable growth and the market will have to be cautious in trying to push the currency higher at speed. Corporate buyers remain below as dealers focus on the risk reward of owning the loonie at these levels (1.0159)

Growth sensitive currencies are not going to hack it through this trading environment. The AUD fell against the yen and pared its outright advance versus the dollar after the referendum pledge from the Greeks and after the Fed refrained from taking additional steps to ease monetary policy. The chances of a disorderly default has raised the stakes that global growth is unsustainable. Earlier in the week the RBA cut rates (-25bp to +4.50%) and has moved to a more neutral policy stance. In Governor Stevens communiqué, the RBA concluded that a more neutral monetary policy stance would be appropriate to maintain growth now that inflation is likely to stay within its 2-3% target over the next two years. The RBA noted that while financial conditions have eased, overall conditions remain tighter than normal and the AUD is still at historically high levels.

The market is now estimating and pricing a neutral policy rate at around +4.0-4.5% and that the RBA is likely to cut by another-25bp in Q1 of next year. Futures dealers have priced in a market easing of about-88bp in total along the curve throughout this cycle. Currently that looks a tad rich, but hindsight is another matter. These cuts are likely to constrain and cap the Aussie. However, on the flip-side, better than expected data out of the US coupled with resilient growth from the Chinese economy will be supporting antipodean currencies. In this current environment, the market remains a better seller of the currency on rallies (1.0277).

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